NBP thwarts FinMin's attempt to cool debt yields
The National Bank of Poland's (NBP) decision last week to issue zl. 16.4 billion ($4 billion) of treasury bonds in the third quarter of 2000 stopped cold the Finance Ministry's attempt to push up the price of the debt instrument by limiting supply.
Economists said that by declaring a lower amount to be sold than in previous months for its April T-bond auction, the ministry hoped to create an atmosphere that would drive up demand for debt instruments, and thereby also their price. In doing so, the ministry hoped T-bond yields, which have risen markedly in recent months due to high interest rates, would come down.
The government had also tried to whet investors' appetites by withholding its timetable for bond auctions in the second quarter, information that is usually readily provided.
But the NBP issue, which in one quarter represents 57% of the average annual value of two-year and five-year T-bonds released so far this year, means an oversupply of bonds will hit the market, driving down prices and keeping yields high. Economists said this was precisely what the Finance Ministry was trying to avoid.
"The new issue has ruined the government's plans," said Mariusz Pypec, a fixed-income analyst at CA IB Securities.
He added that the Monetary Policy Council's (RPP) decision on the same day to maintain its tight monetary policy by keeping interest rates at their current level of 20-21.5% had also thrown a wrench in the Finance Ministry's plans. Debt investors "will now be trying to buy at the highest yields possible," he said.
The NBP's move is good news for investors for two reasons. First of all, investors in long-term zero coupon instruments can expect to see very healthy returns when their bonds reach maturity, Pypec said. But those who prefer not to wait can also make a profit when the yields drop which is expected to happen later this year as the economy picks up and interest rates are likely cut. Falling yields mean a higher price for the bond, and this in turn means higher profit for investors.
Long-term yields have risen substantially since the beginning of 2000, with two-year, five-year and 10-year T-bonds increasing from 14.6%, 12.2% and 9.4% Jan. 5 to 12.51%, 16.2% and 10.2% respectively March 29, the day of the RPP's monthly meeting. Those yields had risen further to 17.05%, 12.71% and 10.36% respectively by March 30. Pypec said yields have the potential to rise an extra 1.8% on average, with two-year bonds showing the greatest likelihood for further increases.
But even before last Wednesday's announcement, the market was very cautious despite the appearance that the government's borrowing needs had subsided after an initial upsurge earlier this year, said James Owen, an economist at SG Bank.
The Finance Ministry's benchmark offer in April came to zl. 2.2 billion ($536.6 million) on two-year and five-year bonds, down from the zl. 2.5 billion ($609.8 million) and zl. 2.8 billion ($682.9 million) offered in February and March, respectively.
Furthermore, state coffers are better off now than in the same period last year. While the total budget deficit after the first two months of 1999 had already hit 60% of the total plan for the year, after February 2000 this figure had dropped to 30%, Owen said.
In normal circumstances, "the market would take it that the fiscal situation is healthier and the government's borrowing needs are coming down," Owen said.
With a decreasing supply of debt instruments available, increasing demand would push up bond prices, meaning investors can make a profit, he said.
However, the Finance Ministry did not announce its auction schedule for the second quarter of the year, as is normally the procedure at the end of the preceding quarter. "The market is suspicious the ministry is holding something back," Owen said. He said investors were wary that the ministry was not completely confident about how much money it needs this year, and that it will likely go to the market for an amount even larger than April's take. Consequently, investors had been bidding less aggressively than would normally be expected.
So far, this year's state balance sheet looks better than in 1999: in 2000 the government intends the budget deficit to hit zl. 15.4 billion ($3.76 billion), 2.6% of its projected gross domestic product (GDP) figure. At first glance, this looks higher than last year's zl. 12.6 billion ($3.23 billion), which hit 2.5% of GDP, Owen said. But those figures don't take into account zl. 7 billion ($1.79 billion) in loans granted to the Social Insurance Office (ZUS) and further funding to local governments, which pushes last year's figure closer to 3.5%.
However, wary investors may well be right in expecting the government to dip in for even more money in the near future. The government signed an agreement last month to flow zl. 1 billion ($243.9 million) to the health care system, and particularly into Patients Funds, to make up for lost contributions. And former public sector workers look set to receive as much as zl. 3 billion ($731.7 million) in pension payment increases this year.
